Saturday, March 15, 2008 weekly review

The week which started as a viral infection is now an ear infection, so this week's review may be brief.

George Zimmerman
has a good overlay showing the NYSE Bullish Percent Index and the S&P. Compare the 2002 and 2008 lows and decide whether you should be bullish or bearish?

Joe Reed is looking for strong bottom in the Retail Index:

And sees bigger problems for the Bank Index:

The Nasdaq still ranks as a breakdown on the weekly chart:

Maurice Walker has his weekly essay:

Who Let The Bears Out Of Their Cage Today? Bear Stearns!

The genie is still in the bottle according to the latest Consumer Price Index (CPI) data released today. Headline inflation declined by .3 % in February to an annualized 4.0 %, from the previous 4.3 % recorded in January. There was a decline in the annualized core rate of inflation from 2.5 % in January to 2.3 % in February. This positive turn on the inflation front, gives the Fed the room they need in order to aggressively cut interest rates on March 18th.

JP Morgan Chase & Co is financing Bear Stearns with a four-week secured loan to increase their liquidity. JP Morgan will be taking Bear Stearns collateral (which is questionable at best), in a concerted effort with the New York Federal Reserve to insure liquidity to Bear Stearns. The Fed is putting its seal of approval on the transaction. Because without JP Morgan Chase, Bear Stearns is cooked. The scope of the problem is liquidity. Essentially, is what we have here is a bank run, with the Fed bailing out Bear Stearns. Bear Stearns got money from the Fed, which is the lender of last resorts. There is a stigma attached to the liquity window and what happened to Bear Stearns today proves it, as their stock tanked. Recently, Bear Stearns has had mega writedowns with reference to the subprime mortgage debacle. The subprime mortgage meltdown has been far reaching with unintended consequences for several of the muckamucks on wall street.

This event rattled the market today and there was a flight to safety, as investors fled securities and acquired government backed bonds. Treasuries surged as securities fell into an abyss, as the S&P 500 lost over 2% dropping 27 points (video analysis at Bear Stearns dropped a whopping 47.37 % closing at $30.00 per share. When fear grips the market there is always a flight to quality, as investors seek gilt-edged triple-A (AAA) investment grade bonds backed by the government.

Yesterday the S&P 500's 15-minute chart suggested a test back to the 1295 area, which was the previous rising trendline. However, the move today well exceeded it, as prices dipped to test the recent 1272 low made on March 10th. So with that minor trendline on the 15-minute chart busted, the S&P 500 now has a lower high and a lower low in place. But the trendline on the daily chart remains in tact, as prices closed off their intraday lows (see 10th chart below). John Magee and Robert Edwards stress in their masterpiece 'Technical Analysis of Stock Trends,' the importance of using entire price bars when in the early stages of a minor trend. Other respected technicians would disagree. So we will have to evaluate this on the price chart as time goes on. For now I am excluding the lower shadow on the candlestick in the daily timeframe.

The sell-off sent the VIX to close above 30 % at extreme levels. The Chicago Board Options Exchange Volatility Index (VIX), measures the amount of volatility of the S&P 500 index options. The VIX should be referred to as a percentage rather than a dollar amount on the price chart because it is not a security. But derivatives do exist like VIX futures contracts. The VIX measures the amount fear in the market and thus can give guidance on expectations going forward. Incidently, not only is VIX nearing extremes, but the Put/Call ratio rose again to 1.40, capitulation is often found when it spikes between 1.50 to 1.70.

Recently, I wrote about what I believe to be a 5th leg down from the peak off the 1388 minor high. In hindsight, we can measure the first wave from 1576 to 1406, with a loss of 170 points. Wave 3 was much more severe with a drop of 253 points from 1523 to 1270. So far, the decline in wave 5 has been much more shallow, posting just a loss of 116 points. Wave 5 may take on a similar percentage decline as that of wave 1 near 170 points or less. Wave 3 was an extended wave and therefore it is less likely to mimic such a percentage loss. A decline of 170 points would take the S&P 500 back to 1218. Ironically that is the point of the next area of major support at 1219, which is the 2006 summer low. If the 1270 low holds, we could be carving out a truncated fifth wave. Which simply means the 5 wave will not fall below the trough of wave 3. Thus, forming a Double Bottom.

Once again, let me reiterate that I don't know the future! I have know idea whether the 1272, March 10th low will hold up or not, nor am I am necessarily convinced that wave 5 has concluded. I can only speculate at this point. But having said that, it is interesting that the 1272 low did in fact hold up today. When will we find a bottom? When capitulation occurs. Bear market territory would be a 20 % decline in the S&P 500, which would be a move below 1252. I am optimistic that a recovery will take place, but I could be wrong. I don't expect a bear market or a recession. But fear is a powerful emotion, and as President Roosevelt said in his inauguration on March 4, 1933, 'The only thing we have to fear is fear itself.' Roosevelt was referring to the bank panic during the great depression, so those words are in reference to a economic upheaval.

His tale of two trendlines shows the battelines:

With his volatility ascending triangle interesting:

Richard Lehman wants to be bullish - but is been held back by the market:

3/15 -- I'd really like to be bullish here, at least for the short term, but the charts are not accommodating. We MAY still be in the process of an uptrend off the low on the 11th, but we've gone about as low as we can go and still cling to that hope. The SPX is barely showing an incline from the 11th bottom to the 14th bottom. Yes, you can say its a possible double-bottom, but much further down and it won't be. Meanwhile, we are still entrenched in downtrends in both short an long term charts. The small caps can go either way and still be in their downtrends. One bright sign, though is the spike in VIX. It now qualifies as enough of a spike to indicate an interim bottom (though there's nothing to say the spike won't move even higher first).

3/13 -- This morning's pullback gave us just what we needed for a low point to draw the short term upchannels (and a heck of a good day trade if you went long there). The subsequent rally gives confidence now to the uptrend. The Naz is on its downtrend line in the one year chart -- crossing that would be a real boost to the intermediate bullish case. Same for the RUT hourly.

3/12 -- The conclusion across the major indexes is that the short term break to a mini uptrend yesterday has already peaked and another mini downleg may have started. While an intermediate low from October may be in, nothing has broken the larger multi-month channel back to the upside yet and it looks like the markets were held back by those downchannel lines today. So, we broke minis but are still in (and feeling the effects of) larger downchannels.

Richard has labeled a 5-wave completed for the Nasdaq:

Yong Pan has an excellent week summary:

He views 1,396 as key for the S&P:

Robert New is showing a bullish divergence in his 3-year Nasdaq chart:

But is taking a long-term view to this correction:

Finally, the importance of the February high as resistance is made clear in his Mid-Cap chart. Note the multiple resistance levels at play: